Insurable interest

Abstract: The invention herein generally pertains to underwriting an insurance policy utilizing sensors to detect, determine, measure and assess one or more conditions, states of affairs, physical properties and process as each relates an insurable property interest. More specifically is disclosed a method and computerized system for managing the underwriting, quoting and binding an insurance policy with regard to the technology used to militate against the financial consequences of certain property losses. The significance of operable safety related devices or system loads are important diagnostic safety markers for measuring one or more properties affecting the safety or risk aversion and for underwriting an insurable interest. This invention also relates to a system and a method for acquiring and assessing the qualities, variables and parameters that affect the underwriting premium for a building structure (commercial or residential), vehicle, aircraft, marine craft or cargo.

Abstract: HAVING ACCEPTED A CONTINGENT liability under an insurance contract, the insurer has an insurable interest in the subject of the insurance policy and can insure all or part of that liability with a second insurer. This reinsurance agreement protects the first insurer (known as the primary or ceding insurer) against unusually large claims, since it permits the risk to be broken down into smaller units which can be absorbed easily by individual insurers. These agreements are commonly placed with other direct insurers and with specialist reinsurance companies usually holding internationally diversified portfolios. The reinsurance agreement affects the risk return structure of the insurer's liability portfolio and consequently affects the risk-return characteristics of the insurer's common stock. The insurance literature has long assumed such reinsurance is an important procedure and much attention has been devoted to analyzing its use. Explicit statements of the objectives of reinsurance can be found in most insurance texts.' These texts commonly stress the portfolio risk effects of reinsurance, that is, the reduction in the probability of the failure (or "ruin") of the insurance fund and the stabilization of returns to its owners.2 The subdivision of policies and the spreading of risk between insurers permits each insurer to hold a more completely diversified portfolio of liabilities than would be available without reinsurance. Apart from explicit statements, the bulk of analytical literature on optimal reinsurance agreements has assumed risk reduction to be the objective. In earlier works, such as Vajda [15] and Ohlin [11], the benefits of reinsurance were identified in the reduction of the variance of the insurer's loss distribution. Subsequently, writers such as Borch [3, Chs. 1-11]; Buhlmann and Jewell [5]; Du Mouchel [6]; and Gerber [7] have used utility analysis to isolate the effects of reinsurance and to identify the properties of the optimal reinsurance treaty. Here, reinsurance is studied as a bilateral risk-reducing device arranged between two or more risk averse insurers. The Pareto condition has been evoked to define the optimality of a reinsurance treaty and, not surprisingly, it is shown to depend upon the form and parameters of the participating insurers' utility functions. The equilibrium conditions for reinsurance have also been established by Borch [3,

Abstract: We examine the effects of speculation using credit derivatives on the cost of debt and the likelihood of default. The availability of credit default swaps induces investors who are optimistic about borrower revenues to sell protection instead of buying bonds. This benefits bor rowers if protection can only be bought with an insurable interest, but can increase the cost of debt and crowd out productive lending if protection can be purchased as a bet on default. We also show that the possibility of speculation on default may cause multiple equilibria and exacerbate the problem of rollover risk. (JEL D86, G13, G31)

Abstract: -The financial crisis of 2008 was caused in part by speculative investment in complex derivatives. In enacting the Dodd-Frank Act, Congress sought to address the problem of speculative investment, but it merely transferred that authority to various agencies, which have not yet found a solution. We propose that when firms invent new financial products, they be forbidden to sell them until they receive approval from a government agency designed along the lines of the FDA, which screens pharmaceutical innovations. The agency would approve financial products if they satisfy a test for social utility that focuses on whether the product will likely be used more often for insurance than for gambling. Other factors-such as a financial product's effect on the efficient allocation of capital-may be addressed if the answer is ambiguous. This approach would revive and make quantitatively precise the common law insurable interest doctrine, which helped control financial gambling before deregulation in the 1990s.Derivatives are financial weapons of mass destruction.-Warren BuffettINTRODUCTIONFinancial products are socially beneficial when they help people insure risks, but when these same products are used for gambling they can instead be socially detrimental.1 The difference between insurance and gambling is that insurance enables people to reduce the risk they face, whereas gambling increases it. A person who purchases financial products to insure herself essentially pays someone else to take a risk on her behalf. The counterparty may be better able to absorb the risk, typically because she has a more diversified investment portfolio or owns assets whose value is inversely correlated with the risk taken on. By contrast, when a person gambles, that person exposes herself to increased net risk without offsetting a risk faced by a counterparty: she merely gambles in hopes of gaining at the expense of her counterparty or her counterparty's regulator. To be sure, a person on one side of the transaction may be gambling while the person on the other side of the transaction may be insuring; then the question is whether the transaction on net reduces risks, increases them, or has no effect. In general, when we refer to insuring and gambling, we mean these net effects rather than the position on one side of the transaction. As we discuss below, gambling may have some ancillary benefits in improving the information in market prices. However, it is overwhelmingly a negative-sum activity, which, in the aggregate, harms the people who engage in it, and which can also produce negative third-party effects by increasing systemic risk in the economy.This basic point has long been recognized,2 but has had little influence on modern discussions of financial regulation. Before the 2008 financial crisis, the academic and political consensus was that financial markets should be deregulated.3 This consensus probably rested on pragmatic rather than theoretical considerations: the U.S. economy had grown enormously from 1980 to 2007, and this growth had taken place at the same time as, and seemed to be connected with, the booming financial sector, which was characterized by highly innovative financial practices. With the 2008 financial crisis, this consensus came to an end, and since then there has been a significant retrenchment, epitomized by the passage of the DoddFrank Act,4 which authorizes regulatory agencies to impose significant new regulations on the financial industry.But the Dodd-Frank Act is an empty vessel: it authorizes agencies to regulate without giving them much guidance as to how to regulate.5 So numerous questions remain open as to how the agencies should use their authority, and indeed whether the Dodd-Frank Act creates the proper regulatory structure.In this Article, we propose a new approach to financial regulation that addresses the problem of financial gambling. We make two contributions. …